| Tue 6 Mar 2012, 7:30 | | MRF - Merafe Resources Limited - Abridged Audited Group Annual Financial |
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MRF
MRF
MRF - Merafe Resources Limited - Abridged Audited Group Annual Financial
Statements For the year ended 31 December 2011
MERAFE RESOURCES LIMITED
(Incorporated in the Republic of South Africa)
Company Registration Number: 1987/003452/06
Share code: MRF ISIN: ZAE000060000
("Merafe" or "the Company" or "the Group")
Abridged Audited Group Annual Financial Statements For the year ended 31
December 2011
Concluded agreement to participate in 20.5% of Lion II - plus
TRIFR improved by 15% - plus
R800m long-term debt facility negotiated and signed - plus
Cash flows from operating activities of R295m - plus
13% decrease in ferrochrome sales volume - minus
Preparation of this report
The following individuals were responsible for the preparation of the Abridged
Audited Group Annual Financial Statements: Kajal Bissessor CA(SA)and Financial
Manager Zanele Matlala CA(SA), Chief Financial Officer
Commentary
Basis of preparation
On 1 March 2012, the board of directors (the Board) of the Company approved the
annual financial statements of the Group and the Company for the year ended 31
December 2011.
These abridged group annual financial statements have been prepared in
accordance with the framework concepts, the measurement and recognition
requirements of International Financial Reporting Standards (IFRS), the
requirements of the Companies Act 71 of 2008, as amended, the AC 500 standards
issued by the Accounting Practices Board and include the information required by
IAS 34 Interim Financial Reporting. The accounting policies adopted are
consistent with those adopted in the annual financial statements for the year
ended 31 December 2010.
Review of results
The Group annual financial statements from which the abridged Group annual
financial statements were derived have been audited by the Group`s auditors,
KPMG Inc. Their unqualified audit report is available for inspection at the
Company`s registered address.
Merafe`s revenue and operating income is primarily generated from the Xstrata-
Merafe Chrome Venture (the Venture), the market leader in ferrochrome, with a
total installed capacity of 1.98 million tonnes of ferrochrome per annum. Merafe
shares in 20.5% of the earnings before interest, taxation, depreciation and
amortisation (EBITDA) from the Venture.
Merafe`s earnings from the Venture decreased from the prior year primarily as a
result of a decrease of 13% in Merafe`s share of ferrochrome sales tonnes from
291 000 in 2010 to 254 000 in 2011 and above inflationary increases in
production costs. Chrome ore revenue as a percentage of total revenue increased
from 8% in 2010 to 14% in 2011 of which 72% relates to chrome ore exported to
Asia during the 2011 financial year. The average Rand Dollar exchange rate for
the 2011 year was R7.26 compared to R7.32 in the 2010 year.
Merafe`s share of EBITDA from the Venture for the year ended 31 December 2011
was R464.4 million. The EBITDA includes Merafe`s attributable share of standing
charges of R134.0 million and a foreign exchange gain of R80.9 million. After
accounting for corporate costs of R77.2 million and share-based expenses of R7.4
million, Merafe`s EBITDA was R379.8 million. Corporate costs increased year-on-
year primarily as a result of transaction costs as well as R33.9 million of
expenses associated with PAYE and VAT tax liabilities, relating to Voluntary
Disclosure Programme Submissions to the South African Revenue Services (SARS)
that the Company submitted during the 2011 financial year. The Venture partners
are in the process of engaging with SARS with a view to obtaining clarity on
other areas where the structure of the Venture creates anomalies with regard to
VAT interpretation.
The profit and total comprehensive income for the year is R116.8 million after
taking into account depreciation and impairment of R153.1 million, net financing
costs of R21.5 million, current tax expense of R47.2 million, deferred tax
expense of R36.7 million and secondary tax on companies of R4.5 million.
Included in the depreciation and impairment charge of R153.1 million is R41.4
million relating to the impairment of the north block making plant at the
Wonderkop smelter which was fully written down in 2011. R29.5 million of the
current tax expense arose as a result of the utilisation of capital expenditure
in the eastern ring-fence and R17.7 million relates to under-provisions in prior
years. The effective rate of taxation has increased from 29% in the prior year
to 43% in the current year primarily due to the permanent differences associated
with the indirect tax liabilities and the prior years` under-provisions. The
balance of unredeemed capital expenditure is estimated to be R270.6 million at
31 December 2011. Net financing costs includes R4.4 million interest primarily
relating to VAT, PAYE and income tax.
Trade and other receivables have decreased significantly from the prior year
primarily as a result of the decrease in sales tonnes in the last half of 2011
compared to 2010. Property, plant and equipment increased from the prior year as
a result of sustaining capex of R173.6 million and R230.8 million of
expansionary capex primarily relating to Project Tswelopele of R78.1 million and
Project Lion II of R112.0 million. Inventory increased by 23% from the prior
year due to an increase in the ferrochrome tonnes on hand and an increase in
costs of production.
Merafe started the year with a cash balance of R320.7 million, generated R358.2
million in cashflows, paid a dividend and secondary tax on companies of R54.0
million, invested R404.4 million in expansionary and sustaining capex, closing
with a cash balance of R220.5 million. Cash in Merafe is R127.4 million and
Merafe`s share of cash in the Venture is R93.1 million.
During December 2011, Merafe concluded agreements with ABSA Capital to secure
long-term debt facilities of R800 million which includes refinancing of its
existing R300 million long-term debt and funding for Project Lion II. At 31
December 2011, Merafe had long-term debt of R300 million.
Review of operations
During 2011, Merafe`s total ferrochrome production was 263 000 tonnes which
represented 65% of installed capacity utilisation. Ferrochrome production was
12% lower than in 2010 which was due to scheduled maintenance during the high
electricity winter months and weaker market conditions that was compounded by
industrial action.
There were above-inflation cost increases for chrome ore, which rose by 24%, and
electricity, which increased by 23% from the comparative 2010 year. However,
overall cash production costs rose by 14% in nominal rand terms, as we were able
to mitigate the effect of the above-mentioned cost increases by optimising
electricity consumption during different tariff periods, by using lower priced
UG2 ore and through ongoing consumption efficiency improvements.
Ongoing initiatives to optimise reductant mixes have contributed an additional
6% reduction in average reductant costs compared to 2010. We expect additional
improvements after the commissioning of the Tswelopele pelletising and sintering
plant in the second half of 2012 and Lion Phase II Project in the second half of
2013.
JSE Socially Responsible Investment (SRI) Index
Merafe was one of only 22 companies to be recognised as Best Performers out of
the 74 companies who qualified for the Index in 2011 and one of only six
companies who have been recognised as Best Performers for the past five years.
The Index assesses company`s social, economic and environmental performance.
Safety
Our biggest disappointment in 2011 was the two tragic fatalities at the
Venture`s ferrochrome operations during the first month of 2011. Our deepest
sympathies to the families, colleagues and friends of Mr Zweni Abraham Mkhize of
our Wonderkop plant and Mr Chaka Aubrey Letsoalo of our Lydenburg plant, who
both lost their lives.
After the tragedies, in addition to the procedures that we always follow after a
fatality, the Venture immediately held a safety summit with its ferrochrome and
mining operations. The actions taken appear to be effective as there have been
no further fatalities in any of our operations during the year. We have reduced
our total recordable injury frequency rate from 4.58 in the comparative 2010
year to 3.90 this year, an improvement of 15% year-on-year.
Market review
Strong global stainless steel production growth, driven mostly by a 15% increase
in stainless steel production in China, resulted in record production of
stainless steel in 2011 of 33.9 million tonnes compared to 32.4 million tonnes
in 2010. Global demand for ferrochrome reached a record 9.3 million tonnes in
2011, exceeding the previous high of 9.1 million tonnes in 2010. Strong end-user
demand and restocking by stainless steel distribution centres in the first half
of 2011 supported the growth in global demand for both stainless steel and
ferrochrome.
A number of global issues, including the earthquake and ensuing tsunami in
Japan, the Eurozone debt crisis, economic woes in the United States and
geopolitical events, such as the Arab Spring, resulted in weaker market
conditions which affected ferrochrome demand in the second half of 2011.
Global ferrochrome production of 8.9 million tonnes remained the same in 2011
compared to the 2010 comparative year. South African production rose during the
first quarter of 2011, but overall volumes from South Africa declined by 9% due
to progressively weaker demand during the year and reduced production during the
high electricity tariff South African winter.
In response to strong demand and an increased availability of chromite ore,
Chinese ferrochrome production increased by 13%, or 288 000 tonnes, on the
production levels achieved in 2010. Despite producing around 2.5 million tonnes
of ferrochrome in 2011, China remains a net ferrochrome importer with 1.8
million tonnes imported in 2011. This represents 42% of total Chinese demand of
which South Africa supplied 1.1 million tonnes, an increase of 18% on the
previous year.
The Chinese chromite ore market continues to grow strongly with 9.4 million
tonnes imported in 2011, an increase of 9% on the previous year. South Africa
supplied around 50% of the chromite imported into China, a 51% increase on
2010`s record volumes. These exports of chrome ore to China are advancing the
development of the ferrochrome industry in China, displacing capacity in South
Africa and undermining South African sales of beneficiated chrome ore in the
form of ferrochrome. The South African ferrochrome industry has brought this
situation to the attention of the Government of South Africa and is engaging
with the Government of South Africa to protect South Africa`s chrome ore
reserves and its mature chrome beneficiation industry.
During 2011, the European benchmark contract price for ferrochrome was an
average of 125 USCents (USD) per pound, a 0.6% increase from the previous year.
Project update
The Venture commenced construction of the Phase II expansion of the Lion
ferrochrome smelter complex and associated Magareng mine development in South
Africa. The bulk earthworks are almost complete and all the long lead items have
been ordered with some of the kiln components already manufactured. The
development of the Magareng mine will be accelerated and it is expected that the
mine will produce at full underground capacity and the processing plant will be
fully operational in the first quarter of 2013. The Lion II smelter will be
commissioned during the second half of 2013.
The Venture commenced construction of the Tswelopele pelletising and sintering
plant during April 2011 and are on track to complete construction in the second
half of 2012 and reach full production in 2013. The bulk earthworks are complete
and the civil work on the critical path is over 80% complete. The Tswelopele
pelletising and sintering plant is being built at the Rustenburg smelter and
will improve energy efficiencies.
Events after the reporting date
1. Awarding of prospecting rights over the farms St George and Richmond
Xstrata, on behalf of the Venture was granted Prospecting Right 2798 (PR)
on 8 February 2012, in respect of chrome over the farms St George and
Richmond, a total of 4 019.9 hectares which, is contiguous to the
Thorncliffe mining complex. Prospecting will commence during 2012.
2. SARS VAT audit of Merafe Ferrochrome and Mining Proprietary Limited
During February 2012, SARS issued an assessment letter to the value of R112
million, including interest and penalties, primarily relating to the
disallowance of input VAT claimed on Project Bokamoso and Project Lion I
for the financial years of 2005 to 2008, following a VAT audit.
Management`s view, supported by independent tax advisors and senior legal
counsel, is that the assessment is incorrect and that the Company was
entitled to claim VAT on Project Bokamoso and Project Lion I. SARS have
been informed of the intention to object to the assessment.
3. Agreement with Eskom to buy back energy not consumed
As per SENS announcement dated 17 February 2012, the Venture has reached
agreement with Eskom to assist with the power utility`s power supply
requirements. The Venture has temporarily closed five of its furnaces from
18 February 2012 until 31 May 2012 and in return, Eskom will buy-back the
energy not consumed by these five furnaces. The arrangement will have a net
positive economic impact for both the Venture and Eskom. The ferrochrome
production loss to the Venture is estimated to be 100 000 tonnes.
Outlook 2011 was characterised by a number of well published global issues,
resulting in weaker market conditions for ferrochrome. Despite this, global
stainless steel production grew by 4.7% year-on-year. We expect European
stainless steel melt production to remain relatively flat in 2012, however,
we expect global stainless steel production to grow by 6% in 2012, driven
mainly by China, Taiwan, North America and India. The expected closure of
approximately 30% of ferrochrome capacity in South Africa as a result of
industry power buy back arrangements with Eskom, followed by expected
winter furnace closures when electricity tariffs increase, is expected to
result in tight supply dynamics in the ferrochrome market.
The aforementioned expected increased production of stainless steel and
tight supply of ferrochrome is expected to increase demand for ferrochrome
units and improve ferrochrome pricing. Expected increases in electricity
costs and mining costs will, however, result in margins remaining under
pressure. The completion of Project Tswelopele and Lion II in 2012 and 2013
respectively will reduce the energy requirements of the Venture, leaving us
well positioned for any upturn in global demand.
On behalf of the Board
Chris Molefe
Non-executive Chairman
Stuart Elliot
Chief Executive Officer
Sandton
6 March 2012
Abridged consolidated statement of comprehensive income
Year ended Year ended
31 Dec 2011 31 Dec 2010
Audited Audited
R`000 R`000
Revenue 2 426 755 2 558 441
EBITDA 379 825 529 815
Depreciation and impairment (153 113) (113 535)
Net financing costs (21 565) (24 997)
Profit before taxation 205 147 391 283
Taxation (88 397) (112 579)
Current tax (29 433) (20 180)
Deferred tax (36 670) (88 354)
Prior years` under-provision (17 783) -
Secondary tax on companies (4 511) (4 045)
Profit and total comprehensive income 116 750 278 704
for the year
Basic earnings per share (cents) 5 11
Diluted earnings per share (cents) 5 11
Headline earnings per share (cents) 6# 11#
Diluted headline earnings per share 6# 11#
(cents)
Dividend per share (cents) - 2*
Ordinary shares in issue 2 493 221 394 2 476 656 043
Weighted average number of shares for 2 478 541 751 2 463 152 779
the period
Diluted weighted average number of 2 486 859 923 2 481 965 326
shares for the period
* This relates to a dividend that was
declared by the Board on 25 February
2011
# Headline earnings reconciliation
R158 million R269 million
Total comprehensive income for the R117 million R279 million
year
Profit on disposal of property, plant - (R10 million)
and equipment
Impairment R41 million -
Abridged consolidated statement of financial position
As at 31 Dec 2011 As at 31 Dec
Audited 2010 Audited
R`000 R`000
Assets
Property, plant and equipment 2 372 768 2 192 600
Total non-current assets 2 372 768 2 192 600
Inventories 1 065 932 865 251
Trade and other receivables 262 979 435 514
Current tax asset - 3 519
Cash and cash equivalents 220 459 320 724
Total current assets 1 549 370 1 625 008
Total assets 3 922 138 3 817 608
Equity
Share capital 24 932 24 767
Share premium 1 262 481 1 253 568
Equity-settled share-based payment 31 759 24 391
reserve
Retained earnings 1 339 496 1 272 279
Total equity attributable to equity 2 658 668 2 575 005
holders
Liabilities
Loans and borrowings 312 778 312 786
Provision for close down and 48 396 39 439
restoration costs
Deferred tax 506 204 469 534
Total non-current liabilities 867 378 821 759
Loans and borrowings 508 831
Financial liability 6 098 11 048
Trade and other payables 375 946 408 965
Current tax liability 13 540 -
Total current liabilities 396 092 420 844
Total liabilities 1 263 470 1 242 603
Total equity and liabilities 3 922 138 3 817 608
Statement of changes in equity
Year ended 31 Dec Year ended 31
2011 Dec 2010 Audited
Audited
R`000 R`000
Issued share capital - ordinary shares 24 932 24 767
Balance at beginning of year 24 767 24 593
Share options exercised 165 174
Share premium - ordinary shares 1 262 481 1 253 568
Balance at beginning of year 1 253 568 1 244 072
Share premium arising from share options 8 913 9 496
exercised
Equity-settled share-based payment 31 759 24 391
reserve
Balance at beginning of year 24 391 22 109
Share-based payment 7 368 2 282
Retained earnings 1 339 496 1 272 279
Balance at beginning of year 1 272 279 1 042 762
Profit and total comprehensive income 116 750 278 704
for the year
Ordinary dividend paid (49 533)** (49 187)*
Total equity at end of year 2 658 668 2 575 005
* Approved by the Board on 26 February
2010
** Approved by the Board on 25 February
2011
Abridged consolidated statement of cash flow
Year ended 31 Year ended 31
Dec 2011 Dec 2010
Audited Audited
R`000 R`000
Profit before taxation 205 147 391 283
Interest paid 32 853 33 853
Interest received (11 288) (8 856)
Depreciation and impairment 153 113 113 535
Adjusted for non-cash items 7 368 2 488
Adjusted for working capital changes (43 113) (240 249)
Cash flows from operations 344 080 292 054
Interest paid (29 186) (31 373)
Interest received 10 383 8 856
Profit on disposal of property, plant and - (13 275)@
equipment
Tax paid (30 157) (23 715)
Cash flows from operating activities 295 120 232 547@
Cash flows from investing activities (404 404) (257 223)@
Insurance proceeds on disposal of property, - 13 275@
plant and equipment
Acquisition of property, plant and (173 603) (167 126)
equipment - sustaining
Acquisition of property, plant and (230 801) (103 372)
equipment - expansionary
Cash flows from financing activities (44 974) (94 402)
Dividends paid (49 533) (49 187)
Secondary tax on companies paid (4 511) (4 045)
Proceeds from issue of shares 9 078 9 670
Decrease in non-current borrowings (8) (50 840)
Net decrease in cash and cash equivalents (154 258) (119 078)
Cash and cash equivalents at the beginning 320 724 462 632
of the year
Effect of exchange rate fluctuations on 53 993 (22 830)
cash held
Cash and cash equivalents at the end of the 220 459 320 724
year
@ The 2010 insurance proceeds on disposal of property, plant and
equipment was reclassified from operating activities to financing
activities to more appropriately present the nature of this item. The
effect on net cash from operating activities is a decrease of R13.3
million and the effect on net cash utilised in investing activities is an
increase of R13.3 million. There is no effect on the cash and cash
equivalents balance as previously reported.
Executive directors: S Elliot (Chief Executive Officer), Z Matlala, B McBride
Non-executive directors: CK Molefe (Chairman)*, NB Majova*, M Mamathuba, A
Mngomezulu*, K Nondumo*, M Salanje*, S Phiri, M Mosweu, Z van der Walt*
* Independent
Company secretary: A Mahendranath
Registered office: First Floor, Block B, Sandton Place, 68 Wierda Road East,
Wierda Valley, Sandton, 2196
Transfer secretaries: Link Market Services South Africa (Proprietary) Limited
Johannesburg
6 March 2012
Sponsor
Deutsche Securities (SA) (Proprietary) Limited
Date: 06/03/2012 07:30:01 Produced by the JSE SENS Department.
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